Sons, daughters, singletons and CEOs

The most minor details can tell a great deal about how a chief executive will perform, research suggests

Google’s Sundar Pichai: it appears that seemingly minor details, ranging from a person’s economic background to whether or not he has a daughter, can be predictive of a chief executive’s tenure

Google’s Sundar Pichai: it appears that seemingly minor details, ranging from a person’s economic background to whether or not he has a daughter, can be predictive of a chief executive’s tenure

 

New Google chief executive Sundar Pichai is Indian, comes from a humble background, is married, and has a daughter and a son.

Readers might ask: so what? After all, most investors would automatically assume that such details are largely irrelevant. Research suggests otherwise, however. All kinds of seemingly minor details, ranging from someone’s economic background to whether or not he has a daughter, can be predictive of a chief executive’s tenure.

Sons and daughters

CEOs with more daughters are less likely to be overconfident, the authors concluded, resulting in them avoiding excessive risks and making “more prudent corporate decisions” that are “better received by the market”.

Further evidence suggesting CEOs are changed by their daughters emerges in another recent study, Shaped By Their Daughters. CEOs with daughters – especially those for whom the daughter was their first-born child – place more emphasis on corporate social responsibility (CSR) programmes. When companies change from a CEO who has a daughter to one who doesn’t, spending on CSR activities declines.

“Male executives partially internalise their daughters’ experiences and values,” the authors concluded. Having a son, they said, appears to have little discernible effect on CEO values.

Risk-taking singletons

Might it be because single CEOs are likely to be younger or to head smaller, volatile firms? No – even after adjusting the results for these factors, the relationship between risk-taking and marital status remains, the study found.

“Competition for mates is akin to an arms race,” they suggest. “Potential spouses prefer wealthier suitors,” resulting in single CEOs being more inclined to swing for the fences.

There are obvious exceptions, the authors admit. They point to Lehman Brothers CEO Dick Fuld, who famously expected his top executives to “get married, and stay married”, as Vanity Fair put it.

Economic background

BloombergStanford University

Financial concerns are a thing of the past for Pichai, but CEOs are shaped by their early-life experiences. One study found that CEOs who grew up during the 1930s Depression were “averse to debt” and inclined to “lean excessively on internal finance”. CEOs with military experience, the researchers added, pursue more aggressive policies.

Another paper, Shaped By Booms and Busts, found that economic conditions when CEOs enter the labour market have a “lasting impact” on their managerial styles. So-called “recession CEOs” are more conservative; they avoid leverage, engage in more cost-cutting and less R&D investment, and take less aggressive tax-avoidance measures. Unsurprisingly, their companies exhibit lower stock return volatility.

Indian culture and CEOs

Satya NadellaMicrosoftPepsiCoDiageoMasterCardSanDiskAdobe

Unsurprisingly, there is growing interest in the so-called “India Way”, to borrow from the title of a 2010 book that explored how the country’s top business leaders are “revolutionising management”. One study, Leadership Style of Indian Managers: A Comparative Analysis, argued that Indian leaders tend to be humble, preferring to be “egalitarian rather than superior in their communication with others”. The same words could be used to describe Pichai, who is renowned for his diplomacy and is “universally well-liked at Google”, according to a Forbes report last year.

High pay for poor performance

Larry PageSergey Brin

Obviously, they don’t need the money – their stock holdings mean both are worth somewhere in the region of $30 billion – but that’s not likely to be the only reason they pay themselves peanuts. One study found that highly paid CEOs tend to salve their conscience by overpaying company employees. Not only does that hurt company pockets, it fails to soothe disaffected staff – the study found that employees are minded to leave firms where the CEO is overpaid, even if they are themselves overpaid relative to other companies.

Last year, a separate study looked at the performance of 1,500 large-cap companies over the 1994-2013 period. The researchers found that the more CEOs are paid, the more their firm underperforms over the following three years, both in terms of profitability and stock returns.

The results were even worse if high-paid CEOs had been in charge for a lengthy period; in such cases, they tend to feel free to stuff the company board with allies, resulting in no one shouting stop to the CEO’s potentially questionable decisions.

High pay leads to overconfidence, the study concluded, and that “leads to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions”.

Award-winning CEOs

Such awards may be good for executives, but they’re bad for the firms. CEOs become addicted to the “media-induced superstar culture”; they begin to spend much more time and effort on non-company activities, such as taking seats on the boards of other firms or writing books.

Earnings management – in essence, massaging the figures – “increases significantly after winning awards”, the authors note. Award winners are much more likely to report negative earnings once five years have passed from their last award, indicating they “artificially inflate earnings” to maintain their supposedly “superstar performance” for as long as possible.

CEOs seem to “extract more rents and consume more perks” following awards, say the authors. Accordingly, instead of cheering such awards and believing them to be evidence that the CEO knows best, company boards should begin to monitor their leaders more than ever before.

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